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U.S. MarketFlash | Economic Watch: March Jobs Report - Back to Reality

Headline: U.S. employers added 98,000 jobs in March, well short of consensus expectations for 180,000. Payrolls in January and February combined for a net downward revision of 30,000. Wages grew by 5 cents per hour and the trailing 12-month increase dropped slightly to 2.7%. The unemployment rate fell to 4.5% and the labor force participation rate held steady at 63%.

Executive Summary: March job creation was disappointing, but seasonal weather factors are partially to blame. Mild winter weather in January and February boosted job growth well above 200,000, and late-season snowstorms contributed to the poor number in March. All told, it was a solid first quarter with job growth averaging 178,000 per month. The average for the past 12 months is 182,000, so employers have not materially changed their hiring patterns. While the “Trump Bump” has been evident in rising business and consumer sentiment, its impact on the jobs data has been less so.

Fed Watch: The Fed is still on track to raise rates two more times this year. Fed officials will not pay much attention to the March employment number, though the deceleration in wage growth could dissuade them from raising rates a third time if it persists. The 10-year Treasury fell immediately following the jobs report, combined with concerns about Thursday night’s U.S. military intervention in Syria.

Job Growth Outlook: The continued decline in the unemployment rate and strong average job growth mean the economy is doing well. Job growth is unlikely to maintain its current pace without significant increases in the participation rate, which will be difficult to achieve with an aging workforce. Even with increased optimism about Trump administration policies, we expect job growth to slow from its previous 12-month average to 150,000 per month for the remainder of the year. However, the stimulative policy changes by the administration may accelerate growth toward the end of 2017 into 2018.

Wage Inflation: Wages grew 5 cents this month, but the annual rate of growth dipped from 2.8% to 2.7%. Wage growth has modestly decelerated in the past few months, but should start to pick up with such a low unemployment rate and with labor shortages in certain sectors. The number of job openings is extremely high, and many employers are having difficulty finding qualified workers.

Labor Force Participation: The labor force participation rate held steady at 63.0%. The monthly number can be volatile, but has remained between 62.4% and 63.0% since August 2013. This stability is encouraging given that the aging of the workforce is working against the participation rate. Similarly, the employment-to-population ratio of prime-age workers increased to 78.5%.

CRE Implications:

Retail: Retailers shed 30,000 jobs in March. The performance has been particularly bad for general merchandise stores, which have lost 89,000 jobs since October 2016. Several prominent retailers recently announced store closings, so job losses likely will continue.

Office: The addition of 56,000 new professional and business services jobs last month is a positive portent for office absorption. The sector has led job growth for the past 12 months. Healthcare was also up by 14,000 jobs and finance was up by 9,000, so the office-related gains are well-rounded.

Construction: Construction is the most weather-sensitive industry and it showed in the numbers: Payrolls grew by just 6,000 in March after increasing by 59,000 in February. Some specialty construction jobs continue to face labor shortages, so a continued decline in job growth for this sector would not be surprising. Commercial projects are driving a large portion of the hiring as housing starts have not increased as much as expected.

Wild Cards:

Oil: The price of oil has bounced back to above $50 a barrel and might go higher if the U.S. expands its involvement in Syria. Mining jobs are up for the year and this has helped energy-related manufacturing as well. Higher oil prices also could kick-start inflation.

Services vs. Manufacturing & Construction: The long-term outlook for manufacturing and construction remains clouded by advances in automation. Despite the good trend growth on these fronts, healthcare and other services jobs will be most sustainable.

Immigration: Restrictions on the H-1B visa program (the Trump administration has suspended expedited service) have caused concern for tech companies in particular. Over time, these restrictions could slow job growth and office absorption in tech-heavy markets.